HSA and Medicare Penalty: the HSA Medicare 6-Month Rule

What is the HSA and Medicare Penalty? Did you know that Medicare enrollment impacts your ability to make HSA contributions? That is, you cannot make any HSA contributions when you are enrolled in Medicare.

Further, there is a penalty for making HSA contributions while on Medicare, and there is a 6-month lookback rule you must pay attention to as well.

Let’s learn about the HSA and Medicare penalty and the 6-month rule.

 

When Should I Stop Contributing to HSA before Medicare?

Medicare eligibility starts at age 65. Those who are still employed and have coverage at their employers may have an HSA-eligible health care plan and want to continue making contributions (or have their employers make contributions).

Medicare enrollment, however, makes further contributions to an HSA impossible.

Further, the normal retirement age for Social Security is (about) 67, but you can claim it as early as 62. You are automatically enrolled in Medicare Part A if you claim social security. You are considered to be enrolled six months before you claim social security! That is, there is a 6-month lookback for Medicare, and you are considered enrolled six months before you claim Social Security!

Therefore, when attempting to contribute to your HSA, you need to avoid claiming Medicare and stop contributing to your HSA 6 months before enrollment. Otherwise, you might suffer from the HSA and Medicare penalty.

 

Medicare Enrolment Disallows Further HSA Contributions

Do you have an HSA through your employer yet are above 65?

Contributing to your HSA in the six months before you enroll in Medicare is a no-no, and there are penalties if you don’t withdraw the excess contributions.

Called the HSA and Medicare penalty, your employer should know better, but often doesn’t.

Since Medicare coverage is retroactive six months before you enroll, it is easy to fall prey to this trap. It won’t apply to months when you have not turned 65 yet.

Moreover, social security enrollment triggers automatic enrollment in Medicare Part A, which you cannot prevent. Therefore, your employer may not tell you to stop contributions six months before you enroll in Medicare, or if you start social security while you are working, you can cause the problem yourself.

This leads to an excess contribution and possible Medicare and HSA penalty if you don’t fix the excess contributions.

 

What is the Penalty for Excess Contributions to an HSA?

The IRS excise tax penalty is 6 percent of the excess contribution. This is charged every year that the HSA remains overfunded.

This penalty is an “excise tax” and applies to each year the excess contribution remains. You pay the 6 percent excise tax every year until you remove it from the account or apply it to a future year.

 

Why is there an HSA and Medicare 6 Month Retroactive Period?

Fundamentally, the government is trying to protect people from being uninsured when they leave employer plans. If you apply for Medicare after 65, you are automatically considered enrolled six months before your enrollment request.

You cannot give up this 6-month retroactive coverage. Though not part of the law, it is required by IRS regulation.

 

Frequently Asked Questions about the HSA and Medicare Penalty

Can I contribute to my HSA if I’m older than 65?

Yes, you can contribute to an HSA if you are older than 65 and have an HSA-eligible plan. You must remember to not overcontribute to your HSA for the six months before enrolling in social security or Medicare.

Spouse on Medicare: Can I Contribute?

Yes. The HSA and Medicare Penalty only affect employees who have HSAs through their employment because they are the ones who contribute out of their respective income.

What about Employer Contributions?

When employers have contributed to your HSA during the six-month lookback period, those contributions must be reversed.

You can request that money back, or you can recharacterize those contributions and treat them as if they were a post-tax bonus payment. This is the usual remedy.

What if there is Profit or Loss in the HSA?

If you have made an overcontribution, you must withdraw the overcontributions and the profit associated with that overcontribution.

If it was just in cash, the interest might be minimal and can be ignored if under $1.

However, if you invested in equities and have a gain or loss, you must calculate the amount attributable to the overcontribution and remove that as well.

How Can I fix an Overcontribution to my HSA?

If you need to fix an overcontribution:

1.  if no W-2 has been issued yet, ask your employer to give you the money back as an after-tax bonus
2. if W-2 has been issued; this is much harder to fix. You will have to fix this overcontribution on your tax return.
3. if W-2 and filled your taxes already, this is even harder to fix and will require re-filling last year’s taxes to correct.

Can I disenroll from Medicare Part A if I am hit with the HSA and Medicare Penalty?

You can disenroll from Medicare Part A only if you withdraw from Social Security and pay back everything you received. Specifically, you will have to pay back all the Social Security money and Medicare funds.

When does the HSA and Medicare Penalty start?

You lose eligibility to make an HSA contribution as of the first day of the month, six months before you enroll in Medicare. Of course, you have to be 65 years old.

Removing excess contributions

Withdraw the excess contributions no later than Tax Day, the year the contributions were made. These withdrawals will be considered taxable income.

Also, remove any income earned on the withdrawn contributions during the year they were made. This will also be taxable income.

When removing excess contributions from your account, inform your HSA trustee. They will then give you a Form 1099-SA. The excess contribution goes in Box 1, and earnings on excess contributions will be in Box 2 and included in Box 1.

Don’t Die with your HSA

Also, remember that an inherited HSA is fully taxable to your heir in the year of death. Here is a nice blog that reminds you Don’t Die With Your HSA!

Remember to Fund your HSA with your IRA one time in your life

Finally, remember the weird QHFD where you can use pre-tax IRA funds one time in your life to fund your HSA. 

 

How Do I Know How Much I can Contribute to my HSA?

You can make a pro-rated contribution to your HSA for the months before you become ineligible due to Medicare enrollment.

The HSA contribution deadline is generally April 15 of the following year.

You pro-rate your contribution based on the number of months you were HSA-eligible on the first day of the month.

Summary: HSA and Medicare Penalty

If you are 65, do sign up for Medicare Part A (which is free) unless you have an HSA at your work.

If you have an HSA that you want to continue contributing to, make sure you don’t sign up for Medicare or Social Security without understanding the HSA and Medicare 6-month Rule. Likely, you want to build a bridge to social security and delay taking it anyway!

It is important to understand that you must sign up for Medicare Part B (and D) as soon as you are eligible, or you will have life-long penalties. You can defer eligibility if you work for an employer with 20 or more employees and remain enrolled in their health insurance. As soon as you are no longer covered (COBRA doesn’t count!), make sure you sign up for Part B and D. You will need to stop your HSA contributions six months before this.

Remember that either Medicare Part A or Part B makes you ineligible to contribute to your HSA.

And also, remember the 6-month lookback rule.

When you apply to Social Security, you are enrolling in part A as well. Be careful if you sign up for Social Security and want to use your HSA still because you are considered enrolled 6 months prior.

If you make an ineligible contribution, check that you are actually over the limit. It is not a time limit; it is an amount limit. You take your number of eligible months and divide by 12, and then multiply that by your contribution limit. Even if you made contributions all year long, as long as you are under the allowed amount, you are fine.

If you do overcontribute, you can take out the ineligible amount and withdraw the excess amount.

Remember this: it is not when it goes in; it is how much can go in depending on how many months you are eligible.

In summary:

• Remember to you HSA holders over age 65: stop HSA contributions six months before you enroll in Medicare
• And when enrolling in Social Security (which some might do while still working), you are automatically enrolled in Medicare Part A. Beware the 6-month lookback rule.